Part two of a new series on defensive equity strategies for Canadian institutions goes beyond investment theory, providing tangible, actionable options for implementing defensive strategies.
TORONTO, Oct. 16, 2014 /CNW/ - With the significant increase in the Canadian equity market in the past three years, adopting a more defensive strategy to protect against potential market shocks and further diversify Canadian equity portfolios is top-of-mind with Canadian pension plan managers. A recent study released by Russell Investments Canada Limited (Russell Canada) - "What It Takes to Implement A Canadian Defensive Equity Strategy" – provides a framework for how Canadian institutional investors can implement various new active and passive defensive investment tools within their portfolio.
The report, authored by Adam Hornung, institutional investment strategist at Russell Canada, is part of a series of papers devoted to this important topic. The first paper, released in July, discussed the merits of employing a defensive mandate within Canadian equity portfolios for institutional investors. This new paper offers ideas on how to achieve this objective and provides options for pursuing desired portfolio outcomes.
Hornung begins the paper by describing the challenge facing many institutional investors in Canada who believe they need to implement a more defensive strategy for their Canadian equity portfolio but have encountered limited investable options. "Few Canadian equity investment managers have actively managed products that are labeled as 'low-volatility' or 'defensive,' and while other providers maintain that their products are defensively tilted, the portfolio management team may not consistently look at defensive factors as part of their investment process."
Hornung goes on to suggest a framework for Canadian institutions to identify and implement various defensive equity strategies. The first step is to adopt a set of metrics to identify the extent to which current investment styles exhibit defensive characteristics. This requires a shift in focus to measuring portfolio risk in terms of absolute objectives and desired outcomes rather than traditional measures of tracking error, or measuring benchmark-relative risk. The second step is to apply this new lens to the Canadian equity market to identify which stocks may be considered defensive. Hornung uses the Canada component within the Russell Global Defensive Index as an effective tool to identify defensive-oriented Canadian stocks and benchmarking defensive-oriented Canadian equity investors.
The third step is to choose a vehicle and determine a strategy for defensive investing. For this step, Hornung describes a number of potential approaches to achieve a similar objective. These include actively investing in value-oriented Canadian equities, which tend to have a defensive bias, utilizing passive "smart beta" index-based investment approaches to reduce unwanted factor exposures such as low volatility and defensive indexes, or simply reducing Canadian equity exposure and thinking more globally in terms of asset allocation to reduce home-country bias. These strategies may all serve to help reduce portfolio volatility, reduce risk and protect plan beneficiaries in the event of a Canadian equity market pullback.
The report concludes by suggesting that Canadian institutional investors who are truly interested in de-risking their portfolios and taking on a more defensive posture should shift their focus from evaluating managers relative to their benchmarks, to adopting measures that better align with the objectives of a lower risk portfolio overall. According to Hornung, "With a little creativity and a subtle shift in mindset toward an outcome orientation and away from a benchmark orientation, Canadian asset owners can go a long way toward adopting a more defensive posture with their portfolios."
You can get a full copy of the study here.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell stands with institutional investors, financial advisors and individuals working with their advisors—using the firm's core capabilities that extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes to help each achieve their desired investment outcomes.
Russell has more than $298.0 billion Cdn in assets under management (as of 6/30/2014) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 6/30/2013). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.6 trillion in 2013 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, including more than 80 countries and more than 10,000 securities. Approximately $5.2 trillion in assets are benchmarked (as of 12/31/2013) to the Russell Indexes, which have provided investors with 30 years of smarter beta.
Headquartered in Seattle, Washington, Russell operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Beijing, Toronto, Chicago, San Diego, Milwaukee and Edinburgh. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow @Russell_News.
Nothing in this publication is intended to constitute legal, tax securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This is a publication of Russell Investments Canada Limited and has been prepared solely for information purposes. It is made available on an "as is" basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.
Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.
Russell Investments and the Russell Investments logo are registered trademarks of Frank Russell Company, used under license by Russell Investments Canada Limited.
Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as Russell Investments.
Copyright © Russell Investments Canada Limited 2014. All rights reserved.
INSTITUTIONAL-2014-10-15-0411 Exp. 10/2015
SOURCE: Russell Investments Canada Limited
For further information: Contacts: Tim Benedict, 212.702.7823; Beja Rodeck Communications, 905.885.5945; For real-time news updates, follow @Russell_News on Twitter.